#3Sig-menu(articles)

How Can We Fix the Deficit?

March 2, 2011

The House passed yesterday a stop-gap spending bill to keep the government operating through Mar 18. It would keep most agencies operating at their current funding levels but also enact about $4B in cuts as a down payment of sorts for the GOP package of $60B in spending cuts, which was approved by the House on Feb 19 but stalled in the Senate because that body was on its Presidents Day Recess. Senate Majority Leader Harry Reid (D-Nev.) will now attempt to get a bill across the floor and into conference in two weeks.

This is about just stop-gap spending for fiscal 2011. So far, however, nothing serious has been proposed for whittling the deficit down from its massive $1.3T to break-even. President Obama’s $3.7T budget for 2012 contains spending cuts and increases along with tax cuts and increases intended to trim $1.1T over a decade from projected deficits. Another decade without reaching break-even! Any suggestion for meaningful cost cutting is immediately dismissed as politically infeasible, so debt continues mounting for America. Just last month, the national debt increased by another $64B to $14.195T. One month earlier, it was $14.131T. In an attempt to delay hitting the national debt statutory limit this spring, the Treasury drained $158B from its cash reserves last month to support government operations, dropping its balance from $349B to $191B.

Everybody agrees that government spending and borrowing is not sustainable, but nobody can agree on a way to fix it. The biggest expenses for the government are Health and Human Services (Medicare and Medicaid), Social Security, and Defense. Neither party will tackle them.

We’ve seen this dance repeatedly over the past two decades and the result is always more spending and a growing national debt that left sensibility in the dust several administrations ago. The discretionary programs on the chopping block comprise just one third of total spending. Take away defense, as Washington always does, and what’s left adds up to just 15 percent of the budget — meaningless. Parties are discussing such line items as the $8B Obama wants for high-speed rail, against which Republicans are taking a hard stand. Who cares?

Changing administrations means nothing on this front. The top five items in the Bush and Obama budgets command the same share of spending.

Because nothing changes, it will probably take a catastrophe in the debt market to force a sudden, unattractive solution. Federal Reserve Chairman Ben Bernanke pointed that out in recent testimony before Congress. Last month, he said:

“One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”

We constantly hear that tough choices need to be made. What tough choices would you make? How would you solve the financial crisis in Washington? Click the comment link below to join the discussion!

For just $200 per year, you’ll receive everything listed above to completely upgrade the way you manage your investments. This is 17% cheaper than the monthly option. This is what I recommend:

Option 2:Monthly Subscription (no refunds)

If you'd like to try The Kelly Letter without paying the full year, you can pay $20 per month.

Option 3:Free Email List

If you'd like to hear more from me but aren't ready to part with any money yet, you're welcome to join my free email list:

Join the free list

Thank you for the work you do. You're a household name here and my wife and I often discuss your letters on Sundays. My ten- and seven-year-old children recognize your name and will eventually be taught to invest using 3Sig and 6Sig. You've had an enormously positive impact on our investing and inspired me to look at the world in more rational and clear terms than I did years ago. I'm sure that thousands of others would say the same.

Matt BarnesProduct Line DirectorOCLC

Join Matt and thousands of other rational investors to invest without stress.